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Are Oil and Natural Gas Investments Good for America, or Are They Harming Our Long-Term Potential?

While there's little doubt that natural gas is providing economic benefit to the U.S., is the potential long-term environmental damage -- and the potential delay of renewable-energy development -- worth the short-term benefit?

I've been a supporter of natural gas for years. The American gas and oil industry has developed remarkable technologies to unlock the vast resources of natural gas (and oil) trapped inside shale formations that had, for years, been considered impossible to produce with any economic viability. But advancements in horizontal drilling and hydraulic fracturing -- or fracking -- have changed all of that.

The result? Huge numbers of new jobs have been created in both oil and gas production, oil imports have decreased substantially since peaking in 2006, and natural gas consumption has increased, largely because of offsetting coal in power production.

However, there is some evidence that natural gas' record as being "cleaner" than gasoline, diesel, and coal isn't completely accurate. There are also many who argue that further investment in a fossil fuel energy economy could slow the progress being made in developing renewable-energy sources, which these critics see as more important to the long-term viability of our economy, environment, and way of life.

US Employment: In Mining, Quarrying, and Oil and Gas Extraction data by YCharts

So what's the truth? Should we continue to advance the production of domestic fossil fuel resources, or should we launch a full-scale effort to advance renewable resources? Is even 50 years' worth of domestic fossil fuels not worth the cost, or is it too viable and important to ignore, even with the potential environmental impact?

As is often the case, the truth probably lies somewhere in between.

"Real" benefits of natural gas versus its oil and coal cousins

Many coal-burning power plants are being converted to natural gas for financial and environmental reasons. Source: Wikipedia user Analogue Kid.

Natural gas is undeniably better than coal and diesel when it comes to particulate emissions, and the difference is especially beneficial for highly populated areas, where the concentration of vehicles and coal-fired power generation leads to smog, acid rain, and the many health issues particulates can cause.

Trees killed from acid rain exposure. Source: Wikipedia.

However, the benefits extend far beyond city limits, as the effects of acid rain have devastated plant and animal life in many areas as well. According to the EPA, two-thirds of the emissions that cause acid rain are a product of burning coal and fuel oil to generate electricity.

Further reducing the use of coal will continue to improve both air quality, and the results of acid rain.

Yet those benefits come with a price While the tailpipe (or power plant) emissions from natural gas are markedly lower than those of coal or oil distillates, methane emissions at production sites, and in the hundreds of thousands of miles of gas pipelines that cross the country, potentially change the story.

Smog cloud from refinery on Curacao. Source: Wikipedia.

There has been enough concern from the scientific and environmental community to elicit action from the federal government. Back in April, the White House announced a plan to assess potential sources of methane emissions at gas and oil wells and pipeline infrastructure, to ascertain just how significant methane emissions really are. The data from these studies would then be used to create regulations and force the industry to reducemethane losses.

The industry's response is a predictable push back against further regulations. Jeff Eshelman of the Independent Petroleum Association of America emailed me this at the time of the White House announcement:

In last year's Greenhouse Gas Inventory, EPA found that methane emissions from natural gas systems had fallen 10.2% since 1990, and emissions from field production had fallen 38% since 2006. Those emission levels were already well below the threshold for natural gas to retain its environmental benefits. In its latest report, EPA finds that methane emissions fell even further to 16.9% since 1990, with field production emissions falling more than 40% since 2006.

The White House acknowledged the fact that methane emissions have indeed fallen over the past two decades, but pointed at the bigger long-term risk of inaction (emphasis mine):

Since 1990, methane pollution in the United States has decreased by 11 percent, even as activities that can produce methane have increased. However, methane pollution is projected to increase to a level equivalent to over 620 million tons of carbon dioxide pollution in 2030 absent additional action to reduce emissions.

This little molecule is methane, and it's 34 times more powerful than CO2 as a greenhouse gas.

The reality is, methane is a horribly powerful greenhouse gas, and the long-term viability of the natural gas industry probably is best served by addressing this real concern. Like it or not, that's precisely the role of government.

The green future still has real challengesThe gains in renewable energy over the past decade have been nothing short of remarkable. According to the International Energy Agency, power generation from renewables such as geothermal, solar, and wind will surpass that of natural gas in 2016, even with the expansion of shale gas production around the world.

This development has been driven by a combination of factors, including new technology increasing the efficiency of renewable generation, innovations that are reducing the cost of renewable technology, and the benefits of increased scale driving costs down. Over the past 30 years, the cost-per-watt of solar has fallen more than 90%. Wind energy has seen similar efficiency and cost gains, and is expected to see another 20% drop in the cost of production by 2030.

However, the core challenges to renewables -- primarily base-load power generation resulting from the inconsistencies in wind and solar -- remain largely unaffected. Even technologies such as hydrogen fuel cells, which can provide base-load needs, are limited by the availability of hydrogen at scale. Until hydrogen can be produced viably in large quantities, it won't offset power generation or transportation powered by fossil fuels.

Final thoughts: Reductio ad absurdum in both extremes The extreme arguments both for and against renewables and fossil fuels alike miss the greater point. The reality is, in the long term, fossil fuels such as natural gas, coal, and oil aren't the answer. But renewables are not yet a viable global solution today. However, these realities should not preclude us from investing in and developing both simultaneously.

As things stand, our economy -- heck, our very way of life -- is built on fossil fuels. Yes, that does need to change, and it is. But it's going to take years for that change to happen. While the change unfolds, investing in responsible, best-in-class oil and natural gas producers with an emphasis on safe and responsible practices is reasonable and necessary.

This is a big, complex world, with a growing population that will demand more and more cheap energy in the coming decades. In the long run, that energy will increasingly come from renewables. In the interim, society will continue developing the resources at hand. We must invest in, and continue to develop, both.

Author

Born and raised in the Deep South of Georgia, Jason now calls Southern California home. A Fool since 2006, he began contributing to Fool.com in 2012. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story.
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